GOOG Alphabet Inc

By Bojan Pancevski and Sam Schechner 

France and the U.S. have struck a truce on the divisive issue of taxing digital giants like Google parent Alphabet Inc., averting a trade war on the matter -- at least for now.

The detente comes after the French President Emmanuel Macron reached out by phone to President Trump on Sunday seeking a way to end the threat of tariffs while they work out a broader accord on digital taxation, according to U.S. and French officials.

As part of the truce, Mr. Macron agreed to postpone until the end of this year a tax that France levied on big tech companies last year, one U.S. official said. In return, the U.S. will postpone retaliatory tariffs until then, too, the official said.

The U.S. official said Mr. Macron had buckled under pressure from Mr. Trump.

France has refused to withdraw its digital tax, a French official said. In theory the country could suspend collection of the tax -- which began last fall -- while both sides seek a broader deal.

French officials say they now hope to reach an international agreement on digital taxation by the end of 2020.

Mr. Macron said in a tweet Monday evening that he had a "great discussion" with Mr. Trump and that "we will work together on a good agreement to avoid tariff escalation."

A White House spokesman said in a written statement that Mr. Trump had spoken with Mr. Macron and that "the two leaders agreed it is important to complete successful negotiations on the digital services tax, and they also discussed other bilateral issues."

The spat started last year when France, frustrated at the slow pace of international discussions on taxing tech giants, implemented a 3% tax on digital revenue from tech companies with more than EUR750 million in global sales. In response the U.S. has threatened to slap tariffs of up to 100% on $2.4 billion of French imports including wine.

While France was the first to implement its tax, several countries, including Italy and Austria, have since followed suit with their own, distinct schemes. Others including Canada and the U.K. have said they are exploring digital taxes of their own.

At the heart of the fight is how to update decades-old tax rules to account for globe-spanning tech giants. Modern multinationals -- particularly ones with digital offerings -- can sell their products across borders in ways that leave little taxable profit in a country where those products are consumed.

The European Union had last year attempted to reach an agreement on a digital tax like France's that would span the bloc. But it abandoned the effort -- which would have required unanimity among EU nations -- because of opposition from smaller countries such as Ireland and Luxembourg that are home to the regional headquarters of several large U.S. tech companies.

To stave off a patchwork of unilateral national levies on American firms, the U.S. has taken an active role in multinational negotiations to come to an international consensus on digital taxation, under the auspices of the Organization for Economic Cooperation and Development, the rich-country club.

So far, a political agreement at the OECD on how to split up digital profits has proven elusive. But the Franco-American truce increases the time for the U.S. and European countries, including France, to find a common ground. France and other countries had pledged to call off their national digital taxes if an agreement can be reached at the OECD.

The truce between France and the U.S. follows a meeting in Berlin between Mr. Macron and Trump national security adviser Robert C. O'Brien, according to people familiar with the talks.

Mr. O'Brien told Mr. Macron that the digital tax could trigger a trade war between the U.S. and France, and subsequently between America and the EU, the people said.

French officials say U.S. Treasury Secretary Steven Mnuchin and France's finance minister will pursue talks on an international tax deal when they meet Wednesday in Davos, Switzerland, on the sidelines of the World Economic Forum.

The deal, which will also lead to talks with U.S. Trade Representative Rober Lighthizer, will allow the parties "avoid what could have been an immediate and unfortunate trade spat," a U.S. official said.

Mr. Trump and EU President Ursula von der Leyen are also due to meet on the sidelines at Davos in a bid to stave off the imposition of U.S. tariffs on EU imports. EU-U. S. trade talks have made little progress over the past year.

Write to Bojan Pancevski at bojan.pancevski@wsj.com and Sam Schechner at sam.schechner@wsj.com

(END) Dow Jones Newswires

January 20, 2020 19:17 ET (00:17 GMT)

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